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Smart Balance: A Beat-And-Raise Story In The Offing?

 December 21, 2012 09:24 AM


(By Mani) Smart Balance, Inc. (NASDAQ: SMBL) is on the cusp of becoming a beat-and-raise story for the first time in its history as a public company as its Natural Brands business is likely to exceed revenue expectations over the next few quarters, taking estimates and shares higher.

Smart Balance's health and wellness platform consists of brands that target specific consumer needs: Glutino and Udi's for gluten-free diets; Earth Balance for plant-based diets; Smart Balance for heart healthier diets; and Bestlife for weight management.

The company, soon to be renamed "Boulder Brands," is undergoing a business transformation that is expected to reward investors. Confronting the reality of a weaker spreads category, the company is now managing its legacy Smart Balance brand as a "cash cow" to fund M&A in fast-growing segments of the natural foods industry.

"This strategy is improving the company's sales growth profile while reducing business risk," RBC Capital Markets analyst Edward Aaron said in a client note.

The company's Natural Brands business is expected to have the strongest growth profile in the natural and organic food sector over the next 12 months. The company's ownership of the two dominant gluten-free brands provides a significant white-space opportunity.

"We believe new product and merchandising plans currently being implemented by the company will activate strong latent demand, resulting in accelerated organic sales growth," Aaron said.

Moreover, Smart Balance is uniquely positioned as the go-to resource for retailers looking to capitalize on the nascent gluten-free trend. Strong acceptance of new products and unique merchandising concepts should enable the company to capitalize on a meaningful distribution growth opportunity.

"Distribution gains in gluten-free should drive significant growth over the next 12–18 months," the analyst said.

In the past 18 months, the company accelerated its push in the natural and organic space by acquiring the two leading brands in the rapidly growing gluten-free market. In August 2011, the company acquired Glutino Food Group, the top-selling brand of dedicated gluten-free products. While Glutino was a sizeable acquisition, adding 20 percent to the company's revenue base at the time, it did not serve as an immediate catalyst for the stock.

The stock wore a black eye from past over-promise, and investors were not prepared to give the company the benefit of doubt on an acquisition that revolved around a consumer theme (gluten-free) that was not well understood.

The company's second acquisition, of Udi's Healthy Foods, was far more transformational for both the business and the stock. Having grown from next to nothing in 2009 to a run rate of over $70 million at the time of the acquisition announcement in June 2012, Udi's took the company's sales mix of natural brands to more than 50 percent, from about 30 percent previously while accelerating the company's overall organic growth rate to the double digits.

For the third quarter, the company reported a net loss of $3.7 million, or 6 cents a share, compared to a profit of $1.1 million, or 2 cents a share, last year. Excluding items, it earned 3 cents a share. Net sales in the third quarter of 2012 increased 41.4 percent to $101.3 million.

For 2012, the company sees net sales in the range of $360 million to $370 million. For 2013, it expects net sales to be in the range of $440 million to $450 million. Analysts expect sales of $369 million for 2012 and $454.54 million for 2013.

"Our outlook calls for revenue and profit upside beginning this quarter," Aaron said.

Shares of the company surged 140 percent in the last year and 191 percent in the last two years. They have trading in the range of $4.90 to $13.70 in the past 52-weeks.

"The stock can work, in our opinion, assuming that Smart Balance brand profits merely stay flat. While our interest in the stock primarily reflects our affinity for the Natural Brands business, flexibility to rationalize the loss-producing milk business leaves us comfortable that Smart Balance can protect its current profit position," Aaron added.

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